Procurement and Outsourcing Strategies Motivations for Outsourcing Economies

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Procurement and Outsourcing Strategies

Procurement and Outsourcing Strategies

Motivations for Outsourcing ¬Economies of scale ¬Risk pooling ¬Reduce capital investment ¬Focus on core

Motivations for Outsourcing ¬Economies of scale ¬Risk pooling ¬Reduce capital investment ¬Focus on core competency ¬Increased flexibility 2

Increased flexibility 1. the ability to better react to changes in customer demand, 2.

Increased flexibility 1. the ability to better react to changes in customer demand, 2. the ability to use the supplier’s technical knowledge to accelerate product development cycle time, and 3. the ability to gain access to new technologies and innovation. 3

Two Substantial Risks Associated with Outsourcing ¬Loss of competitive knowledge ¬Conflicting objectives – Flexibility

Two Substantial Risks Associated with Outsourcing ¬Loss of competitive knowledge ¬Conflicting objectives – Flexibility – costs 4

A Framework for Buy/Make Decisions Q: How can the firm decide on which component

A Framework for Buy/Make Decisions Q: How can the firm decide on which component to manufacture and which to outsource? A: focus on core competencies.

Reasons for Outsourcing by Fine and Whitney ¬Dependency on capacity ¬Dependency on knowledge 6

Reasons for Outsourcing by Fine and Whitney ¬Dependency on capacity ¬Dependency on knowledge 6

Toyota’s Outsourcing Decision Knowledge Capacity Engines Transmissions Electronic systems V V V 7

Toyota’s Outsourcing Decision Knowledge Capacity Engines Transmissions Electronic systems V V V 7

Fine and Whitney observe that “Toyota seems to vary its outsourcing practice depending on

Fine and Whitney observe that “Toyota seems to vary its outsourcing practice depending on the strategic role of the components and subsystems. ” The more strategically important the component is, the smaller the dependency on knowledge or capacity.

Definition of Modular Products (example: a personal computer) ¬Components are independent of each other.

Definition of Modular Products (example: a personal computer) ¬Components are independent of each other. ¬Components are interchangeable. ¬Standard interfaces are used. ¬A component can be designed or upgraded with little or no regard to other components. . ¬Customer preference determines the product configuration. 9

Definitions of Integral Products (example: airplanes) ¬ Integral products are not made from off-the-shelf

Definitions of Integral Products (example: airplanes) ¬ Integral products are not made from off-the-shelf components. ¬ Integral products are designed as a system by taking a top-down design approach. ¬ Integral product are evaluated based on system performance, not based on component performance. ¬ Components in integral products perform multiple functions. 10

E-Procurement In the mid to late 90 s, business-to-business automation was considered a trend

E-Procurement In the mid to late 90 s, business-to-business automation was considered a trend that would have a profound impact on supply chain performance. Between 1998 and 2000, hundreds of e-markets were established in dozens of industries, from chemical and steel to utilities and human resources. These marketplaces promised, among other things, increased market reach for both buyers and suppliers, reduced procurement costs, and paperless transactions. 11

The Value of e-markets ¬Serving as an intermediary between buyers and suppliers. ¬Identify saving

The Value of e-markets ¬Serving as an intermediary between buyers and suppliers. ¬Identify saving opportunities. ¬Increasing the number of suppliers involved in the bidding event. ¬Identifying, qualifying, and supporting suppliers. ¬Conducting the bidding event. 12

How do e-markets generate revenue? ¬Transaction fee ¬Licensing fee (software…) ¬Subscription fee (membership fee

How do e-markets generate revenue? ¬Transaction fee ¬Licensing fee (software…) ¬Subscription fee (membership fee that depend on the size of the company, the number of employees who use the system, and the numbers of purchase orders) 13

Four Types of e-markets 1. Value-added independent (public) emarkets 2. Private e-markets 3. Consortia-based

Four Types of e-markets 1. Value-added independent (public) emarkets 2. Private e-markets 3. Consortia-based e-markets 4. Content-based e-markets 14

Different types of goods purchased by firms ¬Strategic components ¬Commodity products ¬Indirect materials 15

Different types of goods purchased by firms ¬Strategic components ¬Commodity products ¬Indirect materials 15

A private marketplace or a consortiabased e-market depends on ¬Transaction volume ¬Number of suppliers

A private marketplace or a consortiabased e-market depends on ¬Transaction volume ¬Number of suppliers ¬Cost to build and maintain a private site ¬The important of protecting proprietary business practices. ¬Technology and product life cycles. 16

A combination of portfolio approach ¬Long-term contracts ¬Flexible, or option, contracts ¬Spot purchasing 17

A combination of portfolio approach ¬Long-term contracts ¬Flexible, or option, contracts ¬Spot purchasing 17

Case Discussion: Free. Markets Online ¬ It’s a online market-making firm founded in Pittsburgh

Case Discussion: Free. Markets Online ¬ It’s a online market-making firm founded in Pittsburgh in 1995 by entrepreneurs Glen Meakem and Sam Kinnery. ¬ They enabled industrial buyers to link up with their potential suppliers in live electronic bidding at pre-arranged time. ¬ The market for industrial products is over $600 billions annually, approximately 50% of the market that would fit in the model (complete commoditization). 18

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Major Types of Auctions ¬Open Ascending-bid (English) Auction ¬First-price Sealed-bid Auction ¬Open Descending-bid (Dutch)

Major Types of Auctions ¬Open Ascending-bid (English) Auction ¬First-price Sealed-bid Auction ¬Open Descending-bid (Dutch) Auction ¬Second-price Sealed-bid Auction 21